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Report to the Congress on the Effect of Capital Rules on Mortgage Servicing Assets

Analyses on Impact of the Revised Capital Rule

As mentioned above, the federal banking agencies invited public comment on the proposed regulatory capital treatment of MSAs, and addressed comments on this approach in the final rule.

Under section 475 of the Federal Deposit Insurance Corporation Improvement Act of 1991, the amount of readily marketable purchased MSAs that a bank may include in regulatory capital cannot be more than 90 percent of their fair value.117 Section 475 provides the federal banking agencies with the authority to remove the 90 percent limitation on purchased MSAs, subject to a joint determination by the agencies that its removal would not have an adverse effect on the deposit insurance fund or the safety and soundness of insured depository institutions. The agencies evaluated the proposed treatment of MSAs and determined that based on the conservative treatment of MSAs under the revised capital rule, statutory factors were consistent with a determination that the 90 percent limitation could be removed.

In addition, the federal banking agencies considered whether the revised capital rule appropriately reflects the risks inherent in banking institutions' business models. Prior to issuing the revised capital rule, the federal banking agencies conducted a pro-forma economic impact analysis that showed that the vast majority of small banking institutions would meet the revised capital rule's minimum CET1 capital requirement of 4.5 percent plus the 2.5 percent capital conservation buffer on a fully phased-in basis, including the deduction approach for MSAs. As previously noted in the discussion of the regulatory capital treatment of MSAs, the agencies have long limited the inclusion of MSAs and other intangible assets in regulatory capital and believe the revised capital rule's treatment of MSAs contributes to the safety and soundness of banking institutions by mitigating against MSA market value fluctuations that may adversely affect banking institutions' regulatory capital base, particularly during periods of economic distress.

Moreover, under the Regulatory Flexibility Act (RFA), regulators must analyze the impact of significant rules on small entities. Accordingly, the federal banking agencies each conducted and published an impact analysis. NCUA exempts credit unions with total assets less than $100 million from the risk-based capital requirement and determined that its rule would not have a material impact on small credit unions, consequently NCUA did not perform such analysis.118

The impact analysis performed by the federal banking agencies depicted the aggregate effect on small institutions of complying with the revised capital rule. The economic impact analysis of the revised capital rule considered its effect in its entirety, which included the effect of changes to the MSA treatment as one of many changes. The analysis was conducted in a manner consistent with the RFA.

The OCC estimated that complying with the revised capital rule would cost $55.4 million for OCC-supervised institutions with assets of $500 million or less. The OCC estimated that 41 small OCC-supervised institutions would have a capital shortfall of $163.6 million under the fully phased-in revised capital rule. To estimate the cost of this capital shortfall, the OCC calculated the approximate cost of raising this capital by considering the cost of losing tax benefits when converting from debt to equity financing, which yielded a cost estimate of $0.9 million per year for the full $163.6 million shortfall.

The Federal Reserve estimated that complying with the revised capital rule would cost $27.3 million for Federal Reserve-supervised institutions with assets of $500 million or less. The Federal Reserve estimated that nine small Federal Reserve-supervised institutions would have a capital shortfall of $11.3 million under the fully phased-in revised capital rule. To estimate the cost of this capital shortfall, the Federal Reserve calculated the approximate cost of raising this capital by considering the cost of losing tax benefits when converting from debt to equity financing, which yielded a cost estimate of $6,391 per year for the full $11.3 million shortfall.

In the RFA to the FDIC's revised capital rule, the FDIC estimated that complying with the revised capital rule would impact approximately 74 FDIC-supervised institutions with total assets of $500 million or less (small FDIC-supervised institutions) that did not hold sufficient capital to satisfy the requirements of the revised final rule. Those institutions, which represented approximately 3 percent of small FDIC-supervised institutions, collectively would need to raise approximately $233 million in regulatory capital to meet the minimum capital requirements of the revised capital rule.119

The federal banking agencies published and invited public comment on the treatment of MSAs under the proposed revisions to the capital framework.120 The federal banking agencies received numerous comments on the proposal, including comments from industry participants. The federal banking agencies considered all substantive comments received on the treatment of MSAs addressed in the preamble and final rule published by the OCC and Federal Reserve, and the interim final rule by the FDIC. NCUA's proposed and final rules reflect the analysis of each issue that was presented by commenters.121


References

117. Pub. L. No. 102-242, 105 Stat. 2236, 2386-87 (1991). Return to text

118. NCUA risk-based capital requirements that will go into effect in 2019 will only apply to federally insured credit unions with total assets greater than $100 million. NCUA Interpretative Ruling and Policy Statement 15-1 amended the definition of small credit unions to those with assets less than $100 million. NCUA defined the investment in MSAs as a "small asset class." Before finalizing risk-based capital requirements, NCUA identified 432 federally insured credit unions with assets over $100 million reporting MSAs ranging from less than 1 basis points to 132 basis points of total assets, with an average of 20 basis points of assets. In November 2015, NCUA provided a report to the House Financial Services Committee on the risk-based capital final rule containing further analysis of the rule. The report is available at www.ncua.gov/regulation-supervision/Documents/RBC/final-risk-based-capital-rule-report.pdf. Return to text

119. 79 Fed. Reg. 20,757 (April 14, 2014). Return to text

120. 77 Fed. Reg. 52,792, 52,823 (August 30, 2012); 79 Fed. Reg. 11,183 (February 27, 2014); and 80 Fed. Reg. 4339 (January 27, 2015). Return to text

121. 78 Fed. Reg. 62,018, 62,069-62,070 (October 11, 2013); and 80 Fed. Reg. 66,625 (October 29, 2015). Return to text

Last update: August 12, 2016

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